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Friday, October 31, 2008

What Does the Recession Really Mean?

Here is what I wonder about...on a vast, global scale, what does a recession and economic crisis really mean? I think I have a decent grasp of capitalist economics 101. I understand that if a person, or demographic, or maybe even an entire country, has over-consumed and under-saved, they will have failed to accumulate the capital necessary to invest in a future. I get that, for the scope of an "open system".

But in scientific terms, the global economy is a closed system. There is no external creditor to borrow from. So I can't quite get my puny mind around what the implications are on a global scale. Why does there have to be a crash? Why can't we all just more or less keep doing what we have been doing?

I mean, I could understand a global economic crunch caused by a non-economic event, like war, or by a critical resource shortage. That I get. But I don't really, deep down, understand what is different, except that there is a crisis of confidence. Is it that simple? That could do it--if one day we all wake up, and decide to not spend a dime, that would cause the gears of commerce to grind to a halt. Paul Krugman alluded to that in his "Consumers Capitulate" column.

Or is the explanation more subtle? Have we felt flush for years, and been too willing to spend money on frivolities, such as meals out or manicures, for example? And now, as we come to realize that our net worth's aren't what we thought, and our incomes aren't going up like we thought they would, are we generating an economic dislocation, by suddenly shifting our consumption preferences? So we have too many restaurants and cosmetologists, and too few appliance repairmen (to keep our old appliances going, instead of buying new ones)?